Tuesday, March 24, 2009

There have been plenty of takedowns on the plan (Leo provides a good recap in an earlier post tonight). Nevertheless, I thought I'd add a few further thoughts

Aside from being busy, I didn't weigh in because I don't see that much has changed (obviously, Mr. Stock Market disagrees vehemently, but bonds didn't move much today).

Yes, we have numbers now. and we now know how the program for loans differs from the program for securities. Clusterstock is of the view the complexity is deliberate, to confuse the chump taxpayer. Agreed completely.

For loans, the structure is clearly an option for the investor. The fact that the authorities are pretending that options are priced the same as cash bids is, as usual, another way to fleece the taxpayer (ie, somehow pretending that the auction bids are reflective of cash market values. Consider out of the money options).

The fund managers for the purchase of the securities appear to have more skin in the game (max 3 to one gov;t funds, versus 12 to one with the loans), except the fund managers.....are running other people's money! The managers themselves get fees, so they do fine. The question is whether they can stump up enough money for this adventure.

Nevertheless, this is still quite a way from being operational. The fund managers won't be approved until May 1 (perhaps earlier, but from the MLEC, approving managers takes time, so I'd be surprised if they could accelerate this by more than a couple of weeks). Even if they have been soliciting investors, I would think it would take a minimum of a month beyond that to have a first closing (reader sanity check here?) So the funds aren't operational until June. Meanwhile, if you believe Leon Black of Apollo, the commercial real estate market is about to hit the skids in a very serious way, Investors might not be so keen to stump up until all the related shoes have dropped.

Despite the market reaction as if this were detailed, in fact, for every detail presented today, about ten more have to be worked out. And while the discussion of details on the loan program did mention that collusion between investors was a no-no, I don't see any language anywhere to suggest that the powers that be are aware of the potential to game this program between investors and banks. Creative readers have come up with lots of nefarious ideas.

And we still have the $64,000 question: will all these subsidies lead to high enough bids to reach the value at which banks are carrying this dreck on their books? Banks have been consistently unwilling to take losses if they can still keep the paper on their books at fictive values. And in a very big disincentive to participating, the FASB is on its way to weakening mark to market accounting. That may not affect as many assets as one might imagine, but it still around the margin will have an impact.

And then we have the dishonesty and questionable legality. Geithner in his speech today presented the alternatives to his plan as having the government buy the assets and risk overpaying, or letting the banks sit with the nuclear waste. Um, what about putting them into receivership?

Felix Salmon notes out that failure of the plan to get much in the way of bids would make matters worse, by revealing the banks really hold such dreadful garbage that even a super subsidized program won't clear out the dreck. And that, as the Financial Times points out, has pretty serious implications for Obama. Does he realize that he is politically all in on this one, that if the program fails, he is figuratively, and literally (as far as banks are concerned) cashed out?

And then we have questionable legality. One has to wonder if the use of the peculiar auction mechanism and the extreme measures used to draw in not very large in the scheme of things amount of private capital is to create the fiction that the assets are fairly priced, hence the loans from the FDIC and Fed adequately collateralized. My understanding is that a loan in excess of asset value is a grant or gift, and the Fed and FDIC are not authorized to enter into that sort of arrangement.

And we have a final thought, via e-mail, from former bank regulator William Black:

The media appears to have missed the significance of two passages from his Monday press conference where Geithner indicates most explicitly his intention to violate the Prompt Corrective Action law for favored insured institutions. It appears that he intends to keep (favored) insolvent banks under the control of the managers that caused their failure. (And this comes from someone that purports to fear moral hazard!) Of course, the entire asset disposition plan violates the Prompt Corrective Action law, which requires least cost resolution, but that is a more subtle point. You see, insolvent banks, will have "capital" supplied in unlimited amounts by the taxpayers! Only favored failed financial institutions will be bailed out so it will pay to be an FOG (friend of Geithner). The Prompt Corrective Action Act had the quaint notion that we should be a government of laws and outlawed this kind of favoritism.

The germane passage from the press conference:

But the critical part of that program is to make it clear that they will be able to raise capital from the government if they can't raise in the markets so that they can get through a deeper recession. That will help reduce the odds of a deeper recession, help make sure, again, they can provide a level of lending that will be necessary to support recovery.

And a program of insurance -- you could call it capital insurance for the banking system so that banks have the cushion of capital necessary to lend and expand even if the economy goes through a broader -- a deeper recession.

I called the TARP an example of Mussolini-style corpocracy. Has anything changed in the last six months?

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